No place to hide: SARS’ big data

Thanks
to changes in technology and legislation, SARS access to information is ever
increasing.

Gone are the days when taxpayers could
conceal income and assets from the taxman. The advent of the Tax Administration
Act (the Act), coupled with a number of international tax initiatives has
handed SARS an expansive set of powers to gather information.

The volume and detail of the information that
is available to SARS through various provisions under the Act is extensive.
SARS is able to gather information directly from taxpayers, third parties and
will soon be exchanging data with foreign revenue authorities.

The most visible form of information
gathering is the audit process. Historically SARS would knock on the door, and
the taxpayer would be required to provide the auditors with the information
they request. Section 45 of the Act now sets out clearly what form the audit
will take. Notice must be given to the taxpayer allowing ten business days, a
scope must be set out and the provision allows for a mutually convenient date
and time to be agreed between the taxpayer and SARS.

The challenge taxpayers now face is that
"audit” is not defined. While this is important to the concept of an audit, it
is also critical when looking at the Voluntary Disclosure provisions. The
traditional "field” audit doesn’t always look like it used to. SARS now
requests downloads of general ledgers, soft copies of invoices, spreadsheets
and databases and analyses these from their offices. So, if SARS is not
physically coming to the taxpayer’s premises, when does the audit actually
start and is it in fact an audit?

If a taxpayer submits their annual personal tax
return and 45 seconds later receives an assessment reflecting the dreaded "Selected
for audit - Y” followed by a request to submit supporting documents, is this an
audit? No notice was provided, no scope given, so what is this process?

In terms of information gathering, it doesn’t
actually matter. The provisions of the Act allow for SARS to request
information even when not under audit. The "selected for audit” term is in fact
a misnomer, this process is simply a request for further information under
section 27 of the Act pursuant to the submission of a tax return. Many
corporate taxpayers will also have felt the burden of this section with the
immediate issue of the onerous IT14SD (supplementary declaration) once the
corporate tax return is submitted.

Section 46 of the Act is a further example of
the information gathering powers that can be used even when an audit is not
underway. This provision allows SARS to request "relevant material” from the
taxpayer or a third party. SARS must simply identify the taxpayer clearly and
indicate "with reasonable specificity” the information required. The party in
receipt of the notice is then obliged to provide said information. Many
taxpayers, and particularly third parties, questioned and resisted these
requests on the basis of the term "relevant”. Third parties are often caught
between their relationship to the taxpayer as either banker, insurer or service
provider and their obligation to comply with the Act. As a result, they seek
assurance that they are not providing more than is necessary in order to
protect the relationship and therefore question and interrogate such requests.

This cautious approach by third parties and
tax practitioners alike led to an amendment to the Act in 2015. The amendment seeks
to negate these queries by defining "relevant material” as any document or
thing that "in the opinion of SARS" is foreseeably relevant for tax
administration. For example: A request for information to a vehicle financing
company regarding a taxpayer’s vehicle financing arrangement asks for the
colour of the vehicle. It is difficult to understand the relevance of the
colour of the car in determining whether the taxpayer owes SARS money or has
committed a tax offence. It is as relevant as asking for the taxpayer’s shoe
size or eye colour.

Requests for information addressed to third
parties are a favoured method to gather information without notifying or
alerting the taxpayer of any pending audit or investigation. Banks receive
requests for bank statements, information on particular transactions, etc.
Investment companies and asset managers receive requests for information on
maturity dates of investments. Tenants receive requests for information
regarding the due dates of rental payments to their landlords. These types of
requests are usually followed by an instruction under section 179 of the Act to
deduct/withhold/redirect payment to SARS instead of the taxpayer (commonly
known as agent appointments).

One of the more contentious amendments in the
2015 Tax Administration Laws Amendment Act relates to the unilateral extension
of prescription by SARS. SARS is now empowered to unilaterally extend
prescription in cases where the taxpayer has not timeously provided information
as requested. Industry bodies were united in their objection to the draft
during the legislative comment process and as a result the final amendment now
requires SARS to give notice to the taxpayer and provides that the extension
must be proportionate to the delay caused by the taxpayer. It is critical that
taxpayers and tax practitioners familiarise themselves with this new provision
to avoid falling foul of the requirements.

There are however more effective ways of
gathering information about taxpayers. Section 26 of the Act and the updated public
notice promulgated on 6 January 2016 obliges certain industries to report taxpayer
information electronically to SARS. Prime examples of this are the financial
institutions, however medical aids, retirement funds, certain financial service
providers, attorneys and estate agents are also included in this public notice
and required to report to SARS certain incomes (such as interest),
contributions and a myriad of other transactions.

Assessments may also contain a cryptic
sentence that states that the information provided by the taxpayer in the tax
return does not match the information SARS has in its possession. What
information, the taxpayer asks? The SARS system is cross referencing the
interest received amount that the taxpayer captured in the tax return with all
the IT3(b) interest certificates that the banks and other service providers
have already electronically submitted to SARS. Or cross checking the capital
gain declared by the taxpayer against the IT3(c) certificates received from the
financial service providers for those shares and unit trusts that were disposed
of.

The four major banks in South Africa report
on approximately 100 million bank accounts every six months. There is no matter
too trivial to be reported. Every bank account, whether interest earning or not,
must be reported.

SARS is therefore sitting on an abundance of
financial data but it is still not enough. Global tax scandals such as those
that have engulfed Apple, Starbucks, HSBC and Amazon have woken the world’s
revenue authorities up to the realisation that they are losing money. Taxpayers
have assets and income all over the world and in the case of the aforementioned
scandals, structure their affairs to take the best advantage of low tax rates,
exemptions and the much maligned tax havens. These are often not declared, despite
the widespread application of residence based taxation.

Although many of the South African double tax
agreements contain information sharing provisions and specific exchange of information
agreements have been signed between numerous countries, a global solution was
sought which provided for multi-national automatic exchange of data, and which
also covered non-treaty countries (including tax havens). Amendments to the Act
over the last two years have been made to give effect to international reporting
between countries via their respective revenue authorities and South Africa has
been a part of this process.

An Intergovernmental Agreement between South
Africa and the United States was South Africa’s first foray into large scale
and automatic reporting on foreign residents and brings FATCA (Foreign Account
Tax Compliance Act) into the South African tax landscape. Financial service
providers are now obliged under the enabling provisions of the Act to report
financial data on any person that is determined to be a US person, based on a
set of prescribed indicia and with certain minimum financial thresholds. It is
a reciprocal agreement and SARS is able to request the IRS to provide similar
information on South African residents with accounts in the US.

Not to be left behind, other revenue
authorities started similar processes and a global solution was proposed by the
OECD. It is known as the common reporting standard (CRS) on the Automatic
Exchange of Information (AEOI). The multilateral convention of mutual
administrative assistance was drafted and signed by numerous countries
including South Africa. CRS reporting will require all South African financial
service providers to report financial data on all foreign account holders to
SARS. Similar data collection will be undertaken by authorities in other countries
(currently, 74 countries have signed up).
There are no minimum thresholds under CRS. SARS will then exchange this
information with each respective country provided they are a signatory to the
Convention and will receive data on South African residents, in return, from
other participating countries. This
process will begin in 2017 for many countries (including South Africa) and 2018
for others (such as Switzerland), once the last bastion of secrecy.

Ultimately, the sheer volume of data that
SARS will have access to in the future, both local and international, is difficult
to comprehend. Therefore, taxpayers and tax practitioners must be aware that
the net is closing rapidly and act accordingly.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.